Did the SEC Ruin Rakoff’s Christmas?

The headline was for effect. No, U.S. District Judge Jed Rakoff didn’t say the SEC ruined his Christmas. He did, however, note sourly in an order Thursday that he “spent the intervening Christmas holiday” considering the SEC and Citigroup’s requests to freeze a lawsuit against the bank over allegations that it defrauded investors.

But he also made a much more serious charge: That the agency misled him and the U.S. Court of Appeals for the Second Circuit in seeking to halt the lawsuit while the agency appeals Rakoff’s rejection of a $285 million settlement with the Citigroup. FT has the story here.

The Rakoff decision that prompted the appeal, for those of you who still need context at this point, questioned the SEC’s practice of settling cases with companies in which they neither admit nor deny wrongdoing. The SEC says requiring admissions of fact in settlements would harm investors because the agency would have to take many more cases to trial, which would burn through its resources and curb its reach.

In Thursday’s order, Rakoff said the SEC requested a stay in his court, and the parties discussed an expedited schedule, where Rakoff would issue a decision well before Dec. 30.

On Dec. 27, the SEC filed an emergency application for a stay in the Second Circuit but didn’t tell Rakoff, even during a telephone conference with Rakoff hours after they made the filing, he said.

The SEC told the Second Circuit it needed the stay because, without it, Citi would have to respond to its lawsuit by Jan. 3. If the bank denied some of all of the allegations in its response, the settlement would be in jeopardy, the SEC said.

Rakoff believed these statements to be misleading.

Even if Citi filed a motion to dismiss, as a legal matter, that would not constitute and admission or denial, Rakoff said. Plus, in their pleadings with him to freeze the case, neither the SEC nor Citi mentioned Jan. 3 as a key date, Rakoff said.

So, at 4:20 p.m. on Tuesday, the Second Circuit granted the emergency hold without benefit of a lower court ruling. About one minute later, Rakoff issued his order denying the SEC’s motion to stay the case, as we wrote about here.

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